As fall starts to show itself in cooler weather, I want to discuss a topic that usually raises temperatures: inflation. Like a budget-conscious consumer, the Federal Reserve is highly attuned to changes in the price of goods and services; minimizing such swings is one of the Fed’s primary duties, after all. But how does the Fed’s view of prices differ from that of a consumer? And how does the Fed go about stabilizing prices writ large when it lacks the ability to set prices directly? In this post, I explore that apparent paradox from the perspective of a central banker (though I remain a budget-conscious consumer when off duty).
Price Gauging
Inflation is an average of price changes across the full range of goods and services that we as consumers spend our money on. Moreover, it’s an average that weights those items by the share of our budgets that we devote to them. Pumpkin products, an example we will shortly return to, make up an infinitesimally small share of the average U.S. household’s spending. By contrast, food as a whole takes up a much larger share of the budget—closer to 10 percent for the typical household.
We at the Fed have been tasked by Congress with managing inflation—or promoting price stability per the language of our mandate. The Fed’s preferred measure of inflation—the personal consumption expenditures (PCE) index—tracks prices on a huge number of consumer goods: jams and jeans, kites and kitty litter, cars and camping stoves, and on and on (at last count, the PCE accounts for more than 300 categories of goods and services).
Given our mandate, researchers at the New York Fed are naturally quite attentive to the measurement and prediction of inflation. Here’s a non-exhaustive (but maybe exhausting!) rundown of relevant data and analysis from the New York Fed’s Research team:
- Surveys: The Survey of Consumer Expectations polls households on inflation expectations, while our regional business surveys feature multiple price indexes for the manufacturing and services sectors.
- Models: The Multivariate Core Trend (MCT) model measures inflation’s persistence in the seventeen core sectors of the PCE index. The New York Fed DSGE model provides a forecast of core PCE inflation (along with GDP growth and the real natural rate of interest). Outlook-at-Risk estimates the degree of uncertainty surrounding CPI inflation over the next four quarters. The Global Supply Chain Pressure Index monitors another potential channel for price shocks.
- Research: Recent posts on Liberty Street Economics have dealt with how firms set prices; rising costs and a fluctuating inflation outlook among businesses; the drawn-out effects of the 2025-26 tariffs; and the response of the Phillips curve to larger economic shocks.
Policy Paradox?
While the Fed has the means to collect and analyze vast amounts of information about inflation and related factors, it does not directly set the level or growth rate of the prices that consumers face—we certainly don’t set prices for jams, jeans, kites, or kitty litter (or even for crucial fall staples like bratwurst, football helmets, or flannel shirts). As Chairman Warsh clearly acknowledged at the FOMC’s September press conference, “we cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store.” So how does the Fed support the price stability part of its mandate?
The resolution of this apparent paradox is that our role at the Fed is a narrower one than managing prices of specific items. Rather, it is to ensure that the typical change in prices will be small from month to month or year to year.
To see this, let’s think first of a world where not a lot of unexpected shocks are happening (a stretch, I know, but bear with me). In that world, there is little reason for prices to change much from day to day, so we can expect the average change in prices to be small (barring unilateral action from a central bank like the Fed).
Price Shocks
In reality, of course, economic shocks hit us all the time: droughts and floods hit our ag states, oil prices spike because of war, and so on. What the Fed wants to do is to ensure that the markets most directly affected by such shifts can respond in a narrow way.
Now back to pumpkins. Let’s imagine that the world’s appetite for pumpkin pies has inexplicably spiked to an unprecedented level (news that arrives just in time for fall!). Barring a big change in our ability to grow pumpkins, we suspect that pumpkin prices will be under a lot of pressure to grow persistently faster than they have in the past. After all, if they don’t, things would not be tenable—the shelves will soon be bare for sellers that don’t hike prices.
Yet, is this really a big deal? After all, when the shock hits just one item, like pumpkins, that represents a tiny share of most peoples’ budgets; it won’t change overall inflation, the average change in prices across a vast range of goods and services. On top of that, prices of other items could be hit by offsetting shocks—not a bad presumption in an economy as complex as ours. So, a first answer to the question of how the Fed deals with real shocks to certain sectors is that “It doesn’t have to!”
But now consider a shock that is more widespread—a realization that fertilizer demand will likely increase much more rapidly (due, say, to faster growth in Africa or Asia) than our capacity to produce more fertilizer. This means that prices for all food items, a good bit of the typical household’s budget, are going to face persistent upward pressure compared to non-food prices. This development clearly can’t be ignored in the hope that all of these price increases will get washed out by price declines in other market segments.
In the short run, the shock will run its course; if those unaffected by the shock carry on as usual, barring very strong action by the Fed that might well increase the unemployment rate, inflation will now be at least temporarily higher than it was before.
Over a longer period of time, however, things are not so grim. As long as the Fed’s policies lead people and business to expect overall inflation to stay low and stable in the wake of these shocks, they can be taken in stride without inflation being anything more than temporarily high. That is, the aim is to reassure consumers and businesses that the prices of other goods and services, the ones unaffected by shocks, will not persistently grow faster than their “usual” low rate. Which then allows those affected more directly—here, fertilizer users—to hike prices in order to manage the very specific shock that has hit them, with the assurance that prices in the rest of the economy won’t move a lot.
So, how does the Fed work to dispel expectations for a broader wave of price hikes? That mechanism is a bit more subtle, but it basically comes down to this: being clear about its goal of keeping inflation low, then following through by ensuring that the short-term interest rate is set at an appropriate level relative to a “neutral rate.” That allows businesses to change their prices minimally to deal with the very real and pressing shocks they face, rather than to partly overcome or offset a larger or more uncertain general rise in all prices.
Street Level Observations: Keeping Shocks Contained
The Fed cannot directly undo shocks to specific parts of the economy. So there will be times when prices in some sectors move up (or down) rapidly compared to those in other sectors. Indeed, such differential price growth is how the economy responds to a genuine change in the scarcity of some items relative to others.
Practically speaking, then, shocks might cause inflation to accelerate. The Fed’s task is to ensure that this acceleration doesn’t last. And this requires that those who are unaffected by shocks do not view a temporary, narrow rise in inflation as a broader, long-term phenomenon. In turn, overall price growth—inflation—can be contained, eventually reverting to mandate-consistent levels.
In other words, rising pumpkin prices would have a negligible effect on the overall cost of a Thanksgiving dinner, but the same cannot be said of rising fertilizer prices. Yet, as long as monetary policy gives consumers confidence that inflation will remain stable, neither type of shock would have much effect on the prices of the many goods we rush out to buy on Black Friday.
How to cite this post:
Kartik B. Athreya, “Prices, Prices, Prices: Overall Inflation and the Costs You Care About,” Street Level, Federal Reserve Bank of New York Liberty Street Economics, October 9, 2026, https://libertystreeteconomics.newyorkfed.org/2026/10/prices-prices-prices-overall-inflation-and-the-costs-you-care-about/
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Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
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